Profession/Title: Commercial Real Estate Lender

Company: Frost Bank

Date of Interview: 10/20/2017

My fifth interview was conducted with Aaron Echols, a commercial real estate lender at Frost Bank. Going into the interview, I was very interested in learning more about the specific procedures that banks follow in reviewing loan applications. While I am not studying banking, knowledge and insight from the perspective of an actual lender proved invaluable to me. First and foremost, I was able to gain a deeper understanding of why banks go through extensive underwriting processes. Commercial real estate lenders generally do not accept applications unless the developer proves to be qualified. Qualification determinants can include existing assets, good credit scores, and years of experience in the real estate industry. One thing I wanted clarification on was how developers and banks create evaluations of location and demand for a specific property. Mr. Echols revealed that many developers and banks utilize third-party services that provide evaluations of sustainability and potential profitability.

Furthermore, Mr. Echols explained that his duties as a lender includes working with prospects for potential projects, underwriting and performing internal processes, working with attorneys, and monitoring both the construction and financial performance of buildings. Because of this, he works with numerous individuals and companies in the real estate industry and has facilitated many transactions. Mr. Echols also explained that developers that are developing or investing in property for the first time often need to pre-lease their sites, which is an effective way to reduce risk. In addition, developers who have little prior experience are also recommended to partner with someone who has ample experience or can provide financial support. I also learned that some commercial real estate banks have concentrations limits that restrict them on how many loans they may hand out, which is reasonably since real estate loans often surpass over $1 million. Many times, developers will be denied their request from banks if they hold unrealistic expectations for the property. However, investors are often associated and backed by several investors and are able to request capital from their investors if they run out of bank loan throughout the construction process.

Another thing I was curious about was the timeframe in which developers request loans all the way to when the loan is approved and in action. Mr. Echols outlined the entire process, by detailing that first an appraisal process in which unbiased values of a property must be determined. The appraisal process alone will take around four weeks, and environmental reports can take another four weeks. After that, the underwriting process takes around six to eight weeks. After both the appraisal and underwriting processes are conducted, the lender will then determine if the request will be approved based on the risks calculated from the previous processes. If the application is accepted, a six to eight week period of consulting with lawyers to close the loan will ensure, making the entire loan process equivalent to around four months.

Ultimately, Mr. Echols emphasized that in real estate market projections, everything is speculative. Through an intricate evaluation of interest rates, periodic tests from lenders, and pre-leasing requirements, banks can reduce their own risk in loaning out money and ensuring the developer will successfully follow through with the development. From my interview with Mr. Echols, I gained immense insight into the financial world of real estate development, which is arguably the most important concept for investors and developers themselves to master. With this new knowledge in mind, I will continue to focus on the financial responsibilities and knowledge associated with the pre-development stage of real estate projects.

Aaron Echols